Small dealers’ concerns

Despite the best efforts of the regulators, they still are viewed as being detached and insensitive to the concerns of small dealers, particularly regarding both the way in which the rules are applied to these firms and the fees they are required to pay.

This theme of dissatisfaction relating to the treatment of small dealers has been prevalent since Investment Executive first began publishing the Regulators’ Report Card in 2009. And although regulators have taken some steps to alleviate the challenges that smaller firms face, it appears that these efforts continue to come up short.

This is evident in the ratings that compliance officers (COs) and other executives who were surveyed bestowed on their regulators in “the regulator’s sensitivity to the concerns and issues of small firms” category. For example, both Toronto-based self-regulatory organizations (SROs), the Mutual Fund Dealers Association of Canada (MFDA) and the Investment Industry Regulatory Organization of Canada (IIROC), got a rating of 5.0 in the category. In addition, both SROs received low scores in “the regulator’s awareness of dealers’ regulatory burden and concern about keeping that burden to a minimum” category.

“[IIROC] expects one general approach to fit all firms,” says a CO with a Quebec-based investment dealer. “When you compare us to the big banks, they’re able to hire [people who] focus solely on compliance, and that’s not practical for us. [IIROC is] not at all sensitive to the way we do business.”

Adds a CO with a British Columbia-based mutual fund dealer: “[The MFDA] doesn’t understand the procedures of small firms. For example, it wants to see two signatures on everything. It’s a rule that doesn’t make sense [to us]; but every time we do an audit, it’s an issue.”

The MFDA, for its part, is not taking complaints like this lightly, says Mark Gordon, the regulator’s president and CEO. It is looking for a remedy for these concerns.

“Our rules are not ‘one size fits all’,” he says. “We have a rule book that we apply to big dealers one way, and we need to make sure that the way we apply [these same rules] to small dealers makes sense.”

As well, Gordon points out, there is considerable flexibility in the MFDA’s fee structure. For example, he says, there are many firms that are being charged the minimum MFDA membership fee of $3,000.

Moreover, given the sparse resources of some small firms, the MFDA has begun doing more educational training and soliciting feedback from its members. This could help to explain why the SRO’s rating regarding its sensitivity to small firms’ issues improved from an even lower 4.2 in 2012.

“We give actual tools, not just theory and concepts, that compliance officers can use in their day-to-day jobs,” says Karen McGuinness, the MFDA’s vice president, compliance.

As well, the regulator has improved its communications by taking more inquires from its membership. (See story above.)

In contrast, although IIROC’s rating in the “small firm” category was the same as the MFDA’s, it actually tumbled from 5.4 in 2012. In particular, surveyed COs complained that the regulator is not flexible to the unique needs of smaller firms.

“We’re a small dealer, so we don’t have the capital and technology that big banks do,” says a CO with an investment dealer in Ontario. “But that’s not reflected in the way [IIROC] regulates, or in the cost of compliance.”

However, Susan Wolburgh Jenah, IIROC’s president and CEO, says that while she understands that smaller firms may be buckling under the crunch of higher compliance costs, the regulator is doing what it can to ensure those costs are distributed fairly. As an example, she says, IIROC waives market regulation fees for firms that don’t have direct access to exchanges.

Moreover, IIROC is trying to offer more “guidance” to smaller firms. Wolburgh Jenah says that guidance is not necessarily a set of rules to follow, but an interpretation of what the rules mean or an articulation of some best practices: “[Our role] is to make sure that when we’re applying our rules, we’re very clear to distinguish between what is mandatory vs what’s not mandatory. That’s where discretion becomes very key.”

But regardless of the efforts that IIROC and the MFDA are putting forward to address all these concerns, small dealers still feel as if they are being “squeezed out,” which many fear could hasten further consolidation in the financial services industry.

“There used to be around 280 MFDA members when we first started,” says a CO with a mutual fund dealer in Ontario. “And now there’s only about a 100 left.”

Adds a CO with an investment dealer in Ontario: “[The regulators] have no concern for small firms; it [probably] would be easier for them if we were all gone.”

But Wolburgh Jenah is adamant that this is something regulators don’t want to see happen: “We have no interest in ending up in a situation in which there’s entire or complete concentration in terms of the dealer community.”

It’s not only the SROs that are seen to be insensitive to small dealers. Many of these same concerns were expressed regarding the provincial regulators.

For example, the Toronto-based Ontario Securities Commission (OSC) saw its rating in the “small firm” category plummet to a paltry 4.2 from 6.0 in 2012. This decline appears to stem largely from the increased fee structure announced last year. Under the new structure, OSC registrants are facing an average annual increase of 4.7%.

“[The OSC is] nowhere near [other regulators] when it comes to fees,” says an alternative investment dealer in Ontario.

Meanwhile, the Vancouver-based B.C. Securities Commission (BCSC) was the notable bright spot in this category, as its rating rose to 6.7 from 6.0 year-over-year. According to Sandy Jakab, the BCSC’s director, capital markets regulation, there are three reasons for this:

– The BCSC’s fee structure is straightforward and much lower than the OSC’s, which can be advantageous to smaller firms.

– The composition of B.C.’s dealer community is a key differentiator, as it is composed of much smaller firms.

“We are concerned about dealers who are facing many challenges,” Jakab says, “and we have a focus on watching for fee impacts on those small and independent dealers, which are critical to the health of our market.”